When considering the past results of Nationwide Insurance, CIO Jim Korcykoski explains 2008 will forever be known as an asterisk year because of the unprecedented bad performance of Nationwide and nearly every property/casualty insurance carrier.

In the beginning of last year, “we figured there never would be another asterisk year, but 2009 almost did it,” says Korcykoski. “It was like a half-asterisk year. It's been a tough couple of years for the industry.”

Nevertheless, the problems of the last two years don't mitigate the excitement Korcykoski and others in the industry feel about the insurance technology field in 2010.

Insurance is more dependent on technology than most other industries, which Korcykoski believes benefits insurance IT organizations. “It helps us from a trust and credibility perspective, but the bottom line is we need to be good at what we do because for the business to be successful, the IT has to be good,” says Korcykoski.

Deb Smallwood, founder of SMA, predicts 2010 will be a strong year in insurance IT. In a survey on spending plans conducted with readers of Tech Decisions, 76 percent of respondents reported plans either to increase spending or hold it flat.

Not surprisingly, Smallwood learned nearly every company has a long list of needs. “Everyone wishes they had more money, more time, or more resources,” she says.

The good news learned by the SMA analysts is most insurers are trying to create some type of three- to five-year road map. “They are not just saying they need to replace their policy system,” says Smallwood. “They know the sequence of what they need to do–policy system and then add predictive analytics or straight-through processing. They are starting to sequence them out.”

TowerGroup research director Karen Pauli doesn't see any dramatic change in IT budgets for 2010. “It should be flat to maybe a two- to three-percent increase in spending,” she says. “I heard a couple of people talk about decreases, but it's so random and such a small number I don't think that's a trend. I think the carriers in the industry know they have to invest something.”

Decreases in premium dollars make increased spending or even flat budgets a difficult concept for insurers. “It's a tough situation for a lot of carriers,” says Pauli. “There's no backing off around what has to be done with BPM, data, and improving the customer experience. I think carriers are trying to pick out what it is that is going to make the biggest difference for them and triage their investment that way.”

Kimberly Harris-Ferrante, vice president and distinguished analyst with Gartner, agrees 2009 was not a crippling year for insurers.

In looking at industry spending for 2009, Gartner learned one third of carriers spent less money last year than in 2008 with a little more than one third spending close to the same amount. However, somewhere around 30 percent of property/casualty carriers and 20 percent of life/annuity carriers reported spending more money in 2009, according to Harris-Ferrante.

For 2010, Gartner found the majority of insurance companies it spoke with are planning to spend more on technology this year. “We found the investment in data technologies is going up significantly for both P&C as well as life,” she says. “P&C companies are spending money on risk management in 2010 and data warehousing, with huge increases–almost double–in predictive modeling.”

On the life side, insurance carriers are sticking to traditional data warehousing and business intelligence projects, continues Harris-Ferrante.

“Companies are saying they need to be able to get more value out of their data,” she says. “It's an untapped asset, and they need to figure out how to get more value from it.”

INTERESTING TIMES

There is no shortage of interesting projects ahead in 2010, notes Matt Josefowicz, director of Novarica and head of the insurance team. “I think by and large we are seeing budgets going up cautiously,” he says. “We're certainly seeing a lot of investment in different areas that are critical to business success–such as agent portals, policy admin systems, business intelligence. These are the things on top of the board.”

The focus on investment in core systems has held throughout the last decade and Josefowicz doesn't expect the trend to soften for a while. “You figure the average carrier has a handful of policy admin systems across its different units,” he says. “Consolidating those systems, replacing them, and bringing on new systems for new lines of business is going to be a lot of work in this sector for at least the next five to 10 years.”

It doesn't surprise Josefowicz the core systems issue has no quick end in sight. “The problems are well known, and the problems are hard to solve,” he points out.

Such challenges include providing better service to distributors and to customers, processing business more efficiently, and mining internal data to evaluate risk and process business more effectively. “Those are big challenges, and they aren't the kind you can solve in one year,” says Josefowicz.

Nationwide demonstrates its trust in the IT organization by continuing to invest in projects even in tough times, asserts Korcykoski. “We'll literally cut marketing spend before we cut IT spend,” he says. “It's a great endorsement [for IT], but at the same time, it's a lot of responsibility.”

Consequently, demands made by Nationwide's business teams keep increasing. “We are up another five percent [in spending] over where we were in 2009,” says Korcykoski. “When you look over a seven-year period, we are spending three times as much money on large projects as we did in 2003.”

TECHNOLOGY INITIATIVES

Pauli describes herself as a fan of predictive analytics and modeling. Its pervasiveness has made it a given among personal lines carriers, but she sees it becoming an equally important component for insurers working in commercial lines.

“You have to be able to manage expenses and get in there with business intelligence, BPM, data management, and data integration so you can start taking the cost out of your organization without messing up the customer experience,” she says.

The internal use of Wikis and blogs for knowledge transfer within the enterprise is taking place throughout the industry with Web 2.0 and social networking becoming hot areas in 2009. One reason for the excitement is most of the technology to enable these functions is free. “It's more expensive from a time standpoint, but we've seen some people get some great internal synergy from it,” says Pauli.

While she doesn't believe investment in claims systems will continue, she predicts insurers will look to tools that can be integrated with the claims system, such as analytics and dashboards to manage the claims process.

“Where we think there will be more action in 2010 is in underwriting because the underwriters have been neglected as everyone worried about claims,” says Pauli.

Another big area for 2010 will be in document and content management. Harris-Ferrante points out companies are looking at reducing mailing costs and are having conversations about going green.

“We started to hear people talk about customer communication management and being able to deliver more electronic content to customers vs. paper,” she says. “We heard more focus on technologies that would underpin this, such as portal-based technologies and customer communication technologies. We had the technology conversations and the change in business process conversations, and now people actually are going to start to invest in some of the underlying source systems such as content and document management.”

STAYING FOCUSED

Because of back-to-back challenging years, Korcykoski maintains Nationwide is remarkably focused heading into 2010. “Like a lot of companies with good, solid growth over an extended period of time, sometimes you can lose a little of your focus,” he says. “Your spending increases, and you always are funding projects that ultimately result in good things. But you actually may bite off more than you can chew, and you are not necessarily filtering down to the highest-priority items.”

For 2010, Nationwide is focused on the customer, indicates Korcykoski, which means projects that specifically allow Nationwide to evolve with customer specifications.

In the case of property/casualty insurance, Korcykoski feels potential customers expect more information not only to shop and learn online about personal lines coverage but to buy a product online and eventually service it without ever touching an agent.

The Nationwide strategy doesn't exclude the carrier's agency force, but Korcykoski notes it takes advantage of online and traditional needs. “You can choose wherever you want to go,” he says.

Customers can go online and shop for an auto quote, but Korcykoski points out they are not always sure what to do from a deductible perspective or whether they are eligible for discounts and feel the need to call an agent. “They can give the agent their name and ZIP Code, and the agent can call it up,” he says. “What I'm excited about is this capability and focus going into 2010.”

That doesn't mean business will be easier or even better, but Nationwide believes it must react to market needs and make changes where necessary. “Like a lot of companies over the past two years, we've had declining growth in the new business we are writing, and retention is down,” says Korcykoski. “So, we're looking to create that point of inflection in 2010 to go from negative growth to positive growth. That's exciting but a little bit scary.”

NEW CONCERNS

Insurers are concerned with incorporating data feeds into the underwriting process so underwriters are pulling more information from alternate sources about prospective risk, explains Josefowicz.

He also sees more portal strategies laying the groundwork for a possible direct strategy. “No one will admit on the record to contemplating a direct strategy, but a lot of people are contemplating it,” says Josefowicz. “They are watching the way the market is going and the buying preferences of the younger generation, the speed of information flow, and the value of the intermediaries changing.”

Josefowicz doesn't believe any agent-based carriers are ready to jump to the direct channel yet, but he points out the most revealing evidence of a potential shift came in a survey Novarica conducted on self-service issues for small-business insurers.

“A lot of small-business insurance writers offer some type of online self-service, and we asked whether anyone was doing online sales,” he says. “Nobody was, but when we asked why not, the top two responses were a commitment to the agent channel and a fear of alienating the agency channel. The last [bottom] response was a belief the market was not ready for it. What we have here is a class of providers that believe the market is ready for a different and possibly more efficient service method, but those providers aren't going to offer it because of a fear of cannibalizing their current business. Long term that is going to change, and I think a lot of people are trying to lay the groundwork for that change without specifically saying they are preparing for it.”

The value of intermediaries is changing, points out Josefowicz. “[Their value] always has been tied to their expertise and their ability to access markets people couldn't access on their own,” he says. “A lot of other industries have disaggregated in a lot of ways. It's already happening pretty dramatically in personal auto, and there's no reason it won't happen in a lot of other lines.”

The iPhone app developed by Nationwide in 2009 was a specific effort to learn more about the demographic changes of Nationwide's customers. “When you look at the customers who make up the bulk of our business–and, in many cases, the big bulk for many companies–there are a lot of baby boomers and long-term customers,” Korcykoski says. “They may be a little slower to move to certain new technologies, but they are moving. When we look at what we want for new customers–the folks we want to get earlier in their life who are establishing families or coming out of college–we see a distinct shift in their buying preferences.”

At Nationwide, there has been a significant increase in the amount of business that is sold directly to consumers vs. what goes through an agent's office, reports Korcykoski.

In 2007, the percentage of Nationwide business sold direct to consumers was 22 percent, and by 2014, the carrier expects it to reach 30 percent.

“Most of our business is coming through our agents, but our customers aren't saying that's the only way they want to do it,” says Korcykoski. “So, we are going to direct a lot of our business to direct [channel].”

That means more work needs to be done to service the policy because Korcykoski believes customers who buy online also want to service the policy, submit the claim, and get access to the policy without going through an agent.

“The iPhone app was one way not only to fulfill that service need but also [enable] marketing positioning,” he says. “We were the first ones out with that app. Within two months, there were three more companies with it. Product innovation is not going to get you much for a long time. It may give you a little buzz, but someone is going to copy it very quickly.”

Nationwide has no intention of ignoring its biggest sales channel, either. The carrier recently deployed an app for its agents who use BlackBerry, the carrier's preferred mobile platform.

“We gave them an application that allows them to do things such as take pictures of people's homes and upload that as part of the information we gather to insure someone,” says Korcykoski. “They can view documents and photos we put in for their customers. It's what I hope is a beginning of a trend to give our agents access to information in a mobile fashion. If an agent runs into a customer in the mall and the customer has a quick question, the agent can pull up the coverage and give the customer advice. You are going to see a continuing focus on that. That's our core strategy at Nationwide Insurance to support customer demographics and trends.”

VENDOR PROBLEMS

The good news for technology vendors in the insurance space is Gartner has a positive outlook for 2010, including a positive outlook for service providers to help with implementation.

“One thing we found quite interesting is when we asked insurers what are the main challenges when it comes to technology and project plans, the number-one challenge was the staffing problem,” says Harris-Ferrante. “[Insurers] don't have people with the right skills sets. That's going to drive the need for external resources to come in and help fill the gaps. Insurers want to get things done, but if they don't have the right people, they need someone to come in and augment that.”

Gartner also quizzed insurers about specific concerns with insurance technology. The researchers learned the top challenge for both life and P&C companies is legacy systems, whether modifying or maintaining them, reports Harris-Ferrante. “How do you keep the old systems running and meet business requirements?” she asks.

Related to that will be the investment in the tools and technology around legacy modernization. “We are seeing companies talk about BPM to make the legacy system workflow run better and rules engines to externalize those rules in the legacy systems, and we've seen a lot about Web-enabling the legacy systems through portal-based technology as a way to expose things that are trapped in a legacy environment,” says Harris-Ferrante. “For some companies, that will mean revisiting the replacement discussion, but for other companies, it means things such as system consolidation or modernizing the legacy system through those tools and techniques.”

From the vendor perspective, Josefowicz feels spending on software solutions is not moving as dramatically as vendors would like. “It's taking a while for these projects to result in an application sale or a service contract,” he says. “We're not seeing a massive jump in external spend, but we are seeing continued external spend. The selection or evaluation processes probably are slower than vendors would like them to be, but carriers realize the importance of selecting the right partner and making a strong strategic commitment.”

BUSINESS DRIVERS

The economy remains the number-one business driver for 2010, points out Pauli. Second on TowerGroup's list of business drivers is the global regulatory environment. Insurers are dealing with Europe's Solvency II regulations that are changing international accounting standards. In addition, they are navigating state regulatory commissions in the U.S. seeking to prove they are the best point of regulation for American insurers.

TowerGroup's third business driver involves shifting consumer requirements. “Consumers are starting to vote with their feet if they are not getting the kind of service they want,” says Pauli, pointing to self-service initiatives as a starting point.

The good news for IT departments is in all of TowerGroup's top-10 business drivers, technology is a key component in dealing with each.

“The discussion over whether technology needs to be in the insurance industry is gone,” says Pauli. “You can't manage expenses without it. You can't differentiate products and services without it. There's no way to do anything without technology.”

The good news for 2010 and beyond, notes Smallwood, is the insurance industry has adopted a different attitude toward IT spending than what was shown earlier this decade when the industry went through 9/11, the dot-com crash, and Y2K.

“The industry went into the trenches and stopped spending,” she says. “It was like the Dark Ages.”

Since then, insurers have made strategic investments in portals, straight-through processing, predictive analytics, automating the front end, and new claims systems, remarks Smallwood.

“There has been a lot of technology enablement in the business process,” she says. “Insurers realize they can't go back to where they were eight years ago and stop spending. They have seen the value, and it is interwoven into their fabric. Leveraging technology is the only way to survive.”

“Insurance IT came through with some bandages and some bruises, but it wasn't as detrimental as what some people might have projected going into 2008,” says Harris-Ferrante.

CHANGES

The vital lesson from 2008 and 2009 is the importance of agility, emphasizes Josefowicz. “Things can change very quickly,” he says, pointing to regulatory change, economic change, and changes that can open new market opportunities.

Change may build slowly, but eventually it reaches the tipping point. For example, he points to agent portals. Fifteen years ago, no insurer had a good agent portal. Today, it absolutely is a competitive requirement.

“Insurers are used to that slow build and feeling like they have a long time to react, but if you look at the way the market can change dramatically from external factors, insurers need to focus on their own agility and their ability to react and do things differently,” he concludes.

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